Client-level segregation is a fundamental principle of portfolio management regulation. This article explains the demat-in-client-name model and why SEBI mandates this approach.
The Regulatory Mandate
Legal Basis
Regulation 24(14) of the SEBI (Portfolio Managers) Regulations, 2020 requires that the portfolio manager shall segregate each client's funds and portfolio of securities and keep them separately from his own funds and securities and be responsible for safekeeping of clients' funds and securities.
The Demat-in-Client-Name Principle
Regulation 24(15) provides that the portfolio manager shall not hold the securities belonging to the portfolio account, in its own name on behalf of its clients either by virtue of contract with clients or otherwise.
Implementation
Securities of the clients are held in separate demat accounts and the clients can verify their holdings and their investments in a portfolio.
Why Segregation Matters
Investor Protection
Client-level segregation ensures that:
- Client assets are protected from the portfolio manager's creditors
- There is no commingling of client assets
- Clients can verify their holdings directly
- Clients have direct ownership of securities
Prevention of Fraud
Segregation prevents:
- Misuse of client assets
- Unauthorized transactions
- Commingling of client funds
Transparency
Segregation provides:
- Direct visibility of holdings
- Easy verification by clients
- Clear audit trail
How the Demat-in-Client-Name Model Works
Individual Demat Accounts
Unlike mutual funds (which pool money from all investors into a common portfolio), PMS accounts are individually managed — each client has a separate Demat account and a personalised portfolio.
Client Ownership
Securities are held in the client's name in the demat account. The portfolio manager has authority to transact through a Power of Attorney but does not own the securities.
Verification
Clients can verify their holdings and their investments directly through their demat account.
Pool Accounts
Permitted Use
A portfolio manager can keep the funds of all clients in a separate bank account maintained by it and may capture the same in the demat account of its resident Indian clients.
Conditions
- There shall be a clear segregation of each client's fund through proper and clear maintenance of back office records
- Portfolio managers shall not use the funds of one client for another client
- Portfolio managers shall reconcile the client-wise funds with the funds in the bank account on daily basis
Aggregation of Transactions
Permitted Aggregation
Although portfolio managers are obligated to ensure segregation of each client's funds, they may aggregate buy or sell transactions for achieving economies of scale.
Allocation
In the event of aggregation of purchases or sales for economy of scale, inter se allocation shall be done on a pro rata basis and at weighted average price of the day's transactions.
Compliance Requirements
Record Keeping
Portfolio managers must maintain:
- Separate records for each client
- Clear segregation through back office records
- Daily reconciliation
Reporting
Portfolio managers must provide:
- Periodic statements to clients
- Details of holdings
- Transaction reports
Audit
The client-level segregation must be verified during:
- Annual compliance audit
- SEBI inspections
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on client-level segregation compliance for portfolio managers. Our securities law experts help clients implement compliant segregation models, maintain proper records, and ensure regulatory compliance. Contact us for guidance on client segregation and other regulatory matters.